When Japan’s parliament legalized casino gambling last year, it created a wave of excitement among casino operators and institutional investors. But sensitivities about gambling addiction have now focused the policy discussion on a concept known as responsible gaming. This is industry terminology for programs designed to deter customers with known gambling problems from entering casinos. Although well-intentioned, lawmakers are risking a litany of unintended consequences with these policies.

Casinos could be an economic boon for Japan. By one estimate, they could bring in $25 billion a year in revenue. Yet lawmakers are now considering restrictions that could jeopardize those benefits. These include banning cash machines on casino floors, restricting credit card purchases of casino chips to foreign customers only, prohibiting casinos from extending credit to domestic customers, limiting how often domestic customers can visit gambling houses and prohibiting Macau-style VIP junkets.

The extent to which such measures could reduce problem gambling is debatable, especially since Japan’s gamblers already have plenty of other options, including horse racing and pachinko. But one thing is certain: they’d cripple Japan’s casino industry before it could get off the ground.

One problem is that restricting casinos from lending to their own customers means that third-party creditors will fill the void. Japan has a long history of syndicated money-lending at pachinko parlors, and of organized criminal groups attempting to collect debts from insolvent gamblers. If casino patrons had to seek outside sources of credit, they’d be more likely to become targets for these groups.

“The Japanese police have been using new organized crime exclusionary ordinances to clamp down on traditional sources of income for Yakuza groups,” said David Suzuki, of the private security firm Blackpeak Group, in an interview. “I believe they see the legalization of casino gambling as a massive, historic opportunity to resuscitate themselves.”

Customers who borrow directly from a casino can also rest assured that any debt collection will be handled through the collections department or a relevant jurisdiction’s courts -- and not through intimidation or other illegal methods. But these best practices are in jeopardy if traditional casino credit functions are outsourced to third parties.

More important, from a business perspective, is that implementing restrictive lending practices would significantly reduce casino revenue. Casinos function much like financial institutions. Both handle customer accounts, extend credit and collect on unsettled debts. Gaming chips are company obligations -- much like bank notes. In that regard, casinos provide substantial financial liquidity, not only for gambling but also for related businesses, such as restaurants, bars and entertainment. Limiting cash in a casino is analogous to limiting beer in a bar -- it just doesn’t work.

Combined with the proposed limits on domestic gambling and VIP junkets, the government would thus be inhibiting most of the casino industry’s key business segments. This will severely compromise the ability to generate cashflow, discourage institutional investors from committing the billions of dollars of capital needed to get major integrated resorts off the ground, and undermine the industry’s ability to create new jobs and boost economic activity. My company estimates that these measures would reduce potential gambling revenue by up to 50 percent.

In short, the government would be forfeiting most of the potential benefits that casinos could bring to Japan -- before anyone has even broken ground.

A better approach is to try to address potential problems without needlessly scaring off investors and operators. For one thing, regulators should take a holistic view of the costs and benefits of casinos, and recognize that they can increase oversight at any time. Placing arbitrary stipulations on casino operations at the outset of the license application process will only discourage global gaming companies from investing in Japan in the first place. Macau -- which in recent years has rolled out increasingly sophisticated regulations, while remaining the world’s top gambling hub -- offers an example of how a more flexible approach can work.

Likewise, adopting a framework to address problem gambling similar to those that have worked in Las Vegas and Singapore -- through public education, funding for addiction treatment and prevention, training for casino workers, and other prudent measures -- could allow people to sensibly enjoy casinos in Japan without destroying the industry’s proven business model.

To date, operators have expressed unbridled enthusiasm at the prospects for casino gambling in Japan. But that will quickly change if these proposed measures are put in place. Japan should be careful not to kill off its casino industry before it even has a chance.

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By David Bonnet

David Bonnet is a partner at Delta State Holdings, provides corporate finance consulting to gaming and lodging groups and institutional investors. -- Ed.